"The latest trigger of the Hidenburg Omen has prompted the Omen’s creator, Jim Miekka, to exit the market. 'I’m taking it seriously and I’m fully out of the market now,' Miekka, a blind mathematician, said in a telephone interview from his home in Surry, Maine. 'I would’ve probably stayed in until the beginning of September,' depending on how the indicators varied. 'That was my basic plan, until the Hindenburg came along. The Omen has been behind every market crash since 1987,' ” reports WSJ. “ 'It’s sort of like a funnel cloud,' Miekka said. 'It doesn’t mean it’s going to crash, but it’s a high probability. You don’t get a tornado without a funnel cloud.' He added he’s not currently shorting anything, although he may look to short Nasdaq stock index futures in the next few weeks, 'depending on how the technicals go.' ”
Remember, as I reported on my analysis of the HO, the fact that it has empirically forecasted every crash since 1987 is not as important as the fundamentals behind the indicator. Many empirical supports work for long periods of time, then don't. Both Long Term Capital Management and subprime mortgages are examples of investments made purely on the basis of long term empirical support, before they crashed. What you have to do is look behind the numbers to see what they are telling you. HO measures cash flow versus stock momentum. When you have narrowing upward stock momentum on declining cash flow, the stock market is in trouble. That's what HO is flashing now.
The flashing HO coincides with very anemic money supply (M2) growth. Thus the flashing HO warning is not likely to be a warning of a minor downturn easily reversed, but a signal of a downturn that does not have huge money growth to stop the fall. This drop could be a big one.